By: Kevin Urbatsch | Jon Gunter | Patrick C. Farber
Use pooled SNTs and Medicare Set-Aside trusts to protect a plaintiff’s public-benefits eligibility
Settling a case can be a cumbersome, time consuming and a frustrating experience for all parties. When the complexities of public-benefit programs such as Medicare and Medi-Cal are added to the settlement mix, it’s no wonder plaintiff attorneys seek assistance in understand¬ing the necessary legal measures required to ensure their settlements comply with the law and protects their client’s current and future interests.

Some plaintiffs already receive Medicare or Medi-Cal; others may soon become eligible because of the injury that gave rise to the lawsuit. Consumer attorneys should understand how to identify these cases and the steps needed to protect their client’s eligibility for these benefits.

Good planning is essential. Incorrectly prepared settlements may jeopardize the recipients’ eligibility for both Medi-Cal and Medicare, leaving plaintiffs without health care coverage when they may need it most. Litigation proceeds that could be used to enhance the quality of life of the plaintiffs are instead used to pay for medical expenses that would have been covered by government programs.

For example, a plaintiff who is eligible for Medi-Cal and receives a litigation recovery will lose his Medi-Cal until the litigation recovery is spent below $2,000 for an individual or $3,000 for a couple (the resource limits for Medi-Cal).(22 Cal Code Regs §§50419-50420 (Medi-Cal).) The most common solution to this dilemma is to place the litigation settlement into a qualifying first party special needs trust (SNT), either an individual SNT or a pooled SNT. (See, 42 U.S.C. §1396p(d)(4)(A) & (C) allowing SNTs.)

Much like the SNT used to preserve a plaintiff’s eligibility for Medi-Cal as in the example above, a Medicare Set Aside Arrangement (MSA) is used to preserve a plaintiff’s future eligibility for Medicare. However, a problematic situation can arise if the plaintiff is receiving (or soon will receive) both Medi-Cal and Medicare. The solution to this problem is to utilize an MSA inside an SNT. Only one California Pooled SNT currently has the ability to provide plaintiffs’ protection of their settlement recovery from both Medi-Cal and Medicare: the California Charities Pooled Trust (see www.charitiespooledtrust.org).

Medicare protection: Utilizing the Medicare Set Aside (MSA)

If the plaintiff will need medical treatment (post-settlement or judgment) related to the injuries/conditions involved with the incident, and it is also anticipat­ed that future medical treatment would be Medicare-covered and needed at a time when the plaintiff is entitled to receive Medicare, then an issue arises about “reasonably protecting” Medicare’s future interest.

The Centers for Medicare and Medicaid Services (CMS), the federal agency responsible for administering Medicare, takes the position that Medicare’s “future interests” must be reasonably protected in a personal injury settlement (See 42 U.S.C. §1395y(b)(2)(A).) One CMS Regional Coordinator writes:

The law requires that the Medicare Trust Fund be protected from payment for future services whether it is a Workers’ Comp or liability case. There is no distinction in the law. …

Anytime a settlement, judgment or award provides funds for future med­ical services, it can reasonably be expected that those funds are available to pay for future services related to what was claimed and/or released in the settle­ment, judgment, or award. …

The fact that a settlement/judgment/ award does not specify payment for future medical services does not mean that they are not funded. The fact that the agreement designates the entire amount for pain and suffering does not mean that future medicals are not funded. …

While it is Medicare’s position that counsel should know whether or not their recovery provides for future med­icals, simply recovers policy limits, etc, we are frequently asked how one would “know.” Consider the following exam­ples as a guide for determining whether or not settlement funds must be used to protect Medicare’s interest on any otherwise Medicare covered, case related, future medical services. Does the case involve a catastrophic injury or illness? Is there a Life Care Plan or similar document? Does the case involve any aspect of Workers’ Compensation? This list is by no means inclusive.

(Memo from Regional Officer, dated October 16, 2009.)

While not an expression of law or CMS global policy, this memorandum explains the issues that arise when set­tling a plaintiff’s personal injury law­suit. CMS’ position is that when a per­sonal injury settlement involves future Medicare-covered medical treatment (including prescription medications) this implicates the Medicare Secondary Payer Act (MSP). The MSP is a series of statutory provisions enacted in 1980 with the goal of reducing federal federal health care costs,Section 1862(b) of the Social Security Act. 42 U.S.C. § 1395y(b)(6).

The MSP provides that if a primary payer exists, Medicare only pays for medical treatment relating to an injury to the extent that the primary payer does not pay 42 C.F.R. §411.20(2) Part 411, Subpart B. Thus, in a personal injury settlement or judgment, if it involves a claim for future medical costs that Medicare would cover, the plaintiff needs to use settlement funds allocated for future medical costs to pay for all medical care that Medicare will cover allocated to the future medical costs of the settlement or judgment. Until that allocated amount is spent, Medicare will not cover the plaintiff for treatment related to those injuries/conditions involved in the settlement or judgment.

There has been a lot of recent discussion regarding just what attorneys and their clients who receive Medicare are supposed to do to “reasonably protect” Medicare’s future interest in the context of a personal injury settlement. The confusion is understandable because of the lack of direction from CMS. Currently, there are no safe harbors or set procedures for “reasonably protecting” Medicare’s future interest for personal injury cases. Thus, attorneys have attempted to utilize procedures that were established for “reasonably protecting” Medicare’s future interest in Workers Compensation settlements.

One mechanism authorized in Workers Compensation settlements, is the Workers’ Compensation Medicare set-aside arrangement (WCMSA). The WCMSA is an arrangement through which the amount of the settlement or judgment is allocated (or “set-aside”) to cover future anticipated medical expenses related to a claimant’s compensable injuries that would otherwise be covered under Medicare, 42 U.S.C. §1395y(b)(2)B(ii-iii). No Medicare payments are made until the funds that are intended to compensate for future medical expenses are spent to cover medical expenses that would otherwise be covered by Medicare, 42 C.F.R. §411.46. Once the set-aside amount is exhausted, Medicare would continue to pay for expenses.

How much is an acceptable allocation of the set-aside amount for a personal injury settlement is difficult to ascertain. In typical WCMSAs, the parties submit the proposed WCMSA to a CMS contractor for review who then forwards it to the proper CMS Regional Office for approval of the set-aside amount. CMS will issue a ruling. However, for personal injury settlement amounts, certain CMS Regional Offices (such as the San Francisco office) refuse to review an MSA from a personal injury lawsuit (which has been dubbed an “LMSA” (Liability MSA). Thus, in these regions, there is no assurance that the set-aside amount selected will ultimately be approved by CMS.

Despite the lack of assurance, in most situations, it is still best if the LMSA is sent in for review and the specific LMSA language is included in settlement agreements as to how it is to be funded and administered. This way, plaintiffs can show CMS later that everything that could be done to “reasonably protect” Medicare’s future interest was done and CMS had been put on notice of the allocated set-aside amount. Thus, plaintiffs would have an excellent argument that their Medicare payments should continue.Medi-Cal protection: utilizing the Special Needs Trust
If a plaintiff is receiving Medi-Cal or Supplement Security Income (SSI), these public benefit programs only allow an individual to have $2,000 in resources to remain qualified. The primary way to preserve these benefits is to transfer the settlement or judgment into a qualifying first-party SNT. This way the settlement or litigation proceeds are not counted against the resource limitation.

The requirements for the two types of “safe harbor” SNTs in use in California are:

A trust that contains the assets of an individual with a disability under age 65, established for his or her benefit by a parent, a grandparent, a legal guardian, or the court, if Medi-Cal will receive all amounts remaining in the trust on the beneficiary’s death up to the amount of Medi-Cal benefits paid, 42 U.S.C., §1396p(d)(4)(A). This trust is commonly called a (d)(4)(A) SNT, litigation SNT, or a payback trust.

A trust that contains the assets of an individual with a disability if (a) the trust is established and managed by a nonprofit association and maintains separate accounts of pooled assets; (b) the accounts are established by a parent, a grandparent, a legal guardian, the individual beneficiary, or the court; and (c) the state will, on the beneficiary’s death, receive all amounts remaining in the beneficiary’s account (not retained by the trust) up to the amount of Medi-Cal benefits paid, 42 U.S.C. §1396p(d)(4)(C). These trusts are commonly known as Pooled SNTs or (d)(4)(C) SNTs.

A pooled SNT is typically used to preserve Medi-Cal eligibility if the plaintiff is age 65 or over, the beneficiary has capacity and wishes to join immediately, or the plaintiff wishes professional management of the assets.

Protecting the plaintiff receiving both Medicare and Medi-Cal

If a plaintiff is receiving both Medicare and Medi-Cal, the existence of an LMSA account can jeopardize the plaintiff’s continued eligibility for Medi-Cal. Because LMSAs are funded with property belonging to the plaintiff, each will be subject to Medi-Cal’s $2,000 resource restrictions, CMS Memorandum (July 1, 2005) Q13. In addition to the resource limitation, the funding of the LMSA will be treated by DHCS as a gift resulting in the imposition of a period of ineligibility for Medi-Cal that could last years, 42 USC §1382b(c). As a result, funds held in an LMSA will generally disqualify the plaintiff from Medi-Cal.

The solution to this dilemma is to have the plaintiff’s pooled or individual SNT own the LMSA. This way, the LMSA is treated as an exempt asset for Medi-Cal purposes. The LMSA is then administered inside the SNT just as if it was owned directly by the plaintiff. The plaintiff continues to receive SSI, Medi-Cal and Medicare and has the benefit of the litigation proceeds to enhance his or her quality of life.

One additional issue can arise when the plaintiff dies. The litigation SNT must pay back to Medi-Cal all payments it made on behalf of the plaintiff. If there is an LMSA, assets inside the LMSA cannot be released until all medical claims have been paid, CMS Memorandum (Apr. 21, 2003). This may involve holding the LMSA open for a period from 15 to 27 months after the date of service to make sure all claims have been paid. However, the Medi-Cal agency may require payments for its claims immediately and force a trustee to make an impossible choice between complying with Medi-Cal agency request or holding assets and complying with Medicare’s agency request.

Placing funds into the Pooled SNT provides a solution to this issue as well. The Charities Pooled Trust is allowed to retain funds in the trust and thus legally satisfy Medi-Cal’s payback requirement and also satisfy Medicare’s requirement to pay all remaining health care costs.

Using the SNT and LMSA are important tools to protect a plaintiff’s Medicare and Medi-Cal eligibility. These tools should be established and administered at the time of settlement to prevent accidental loss of public benefits.

Kevin Urbatsch is principal of Myers Urbatsch, P.C. in San Francisco. He is a Certified Specialist in Estate Planning, Probate and Trust Law by the California State Bar Board of Legal Specialization. He is a nationally recognized expert on special needs and settlement planning law for elders, minors and persons with disabilities. 415-896-1500, kevin@urbatsch.com

Jon Gunter is Executive VP, West Coast, for MEDVAL. MEDVAL is a national Medicare compliance services firm with its West Coast office in Irvine. 888-SET-ASIDE, jgunter@medval.com

Patrick C. Farber

Pat Farber has 35 years of insurance experience with more than 30 years in the structured settlement field. Pat specializes in providing structured annuities for medical malpractice, personal injury, product liability, workers’ compensation, toxic torts, and construction defect cases as well as for non-physical injury cases and attorney fees. He participates in court hearings, arbitrations and settlement conferences throughout California, the West Coast and in other areas of the United States. He has personally placed over $3 billion in annuity premiums and U.S. Government notes.